[Closed] Impose a royalty on the secondary sales of ENS names to offset the running costs of TNL development

Since the temp check is negative this isn’t proceeding and the thread can be locked.

[Temp Check] Impose a royalty on the secondary sales of ENS names

In anticipation of the running costs of $11,500 per day requested by True Names Ltd in [EP#][Executable] Funding True Names Ltd for ENS development, I’d like to initiate a discussion of the idea to implement royalties on secondary sales of ENS names as an additional revenue stream to help offset this cost.

Currently, ENS collects no royalties on secondary sales, meaning that ENS sees no upside to the large-scale name trading carried out in secondary markets, yet we spend a lot of time supporting users doing this in various ways.

I propose that we implement a royalty to add a revenue stream to the DAO so that we can both cover these running costs, and also introduce some friction in the secondary sales market.

A royalty of 6% would be enough to cover the requested running costs for TNL development, but a higher royalty would introduce more friction in secondary sales markets and increase the revenue stream to the DAO with little to no downside to users.

To be perfectly clear: The revenue from royalties would not go directly to TNL, but into wallets controlled by the DAO.

Royalty percentage

Based on secondary sales statistics over the last 7 days from NFT Stats the volume of secondary market trades amounts to $1.43M per week. Based on those (admittedly fluctuating) figures the revenue of implementing a royalty of n% (rounded downwards in US Dollars) would be:

  • 1% Royalty yields $2,042 per day
  • 2% Royalty yields $4,085 per day
  • 3% Royalty yields $6,128 per day
  • 4% Royalty yields $8,171 per day
  • 5% Royalty yields $10,214 per day
  • 6% Royalty yields $12,256 per day (This is the lowest option that completely offsets the running costs of TNL development and yields a net of +$756 per day)
  • 7% Royalty yields $14,300 per day
  • 8% Royalty yields $16,342 per day
  • 9% Royalty yields $18,385 per day
  • 10% Royalty yields $20,428 per day

As both the 7-day secondary sales volume as well as ETH fluctuates a lot these figures are meant to give a very rough idea of what impact royalties can have, rather than to be precise. If this proceeds to a proposal, we’ll do a more careful and precise calculation.


Should ENS introduce a royalty on secondary sales?

  • Yes
  • No

0 voters

What royalty percentage is most appropriate?

  • Lower (please motivate in comments)
  • 1%
  • 2%
  • 3%
  • 4%
  • 5%
  • 6%
  • 7%
  • 8%
  • 9%
  • 10%
  • Higher (please motivate in comments)

0 voters

If introduced, should revenue from royalties be earmarked for ENS development or added to the general treasury?

  • Added to the general treasury as an additional revenue stream
  • Added to a separate wallet controlled by the DAO but earmarked for development

0 voters

If I’ve missed anything or calculated incorrectly, please let me know in the comments.

2 Likes

It’s worth consulting article II of the constitution here:

The primary purpose of registration fees is as an incentive mechanism to prevent the namespace becoming overwhelmed with speculatively registered names. A secondary purpose is to provide enough revenue to the DAO to fund ongoing development and improvement of ENS. ENS governance will not enact any fee other than for these purposes.

Given that the DAO is not hurting for income from primary sales right now, I can see two arguments for a royalty on secondary sales:

  1. It satisfies the ‘incentive mechanism’ requirement by depressing secondary market sales somewhat, with the implication that it makes registration for resale slightly less attractive.
  2. Although the DAO’s income at present is sufficient to cover operating expenses, there is concern that it may not be sufficient in future, and there’s a need to ensure the long-term survivability of ENS.

If #1 is the motivation, primary consideration would need to be given to what percentage would best accomplish the goal of making the secondary market relatively less attractive than the primary market. If #2 is the motivation, the proposal should include criteria for revising or eliminating the royalty if the DAO treasury reaches the point where it’s no longer necessary.

6 Likes

I aimed to accomplish both. I don’t view it as an either-or proposition.

Any reasonable royalty percentage would accomplish that slightly. For larger than slight differences we would need to look at relatively high royalties (50+%) - if you’re for that, I added the option of “Higher (please motivate in comments)”

If enough people share that sentiment, I’ll add more choices.

I think that it’s premature to include that in the temp check, but I’d certainly add that to the proposal if the temp check is positive, as well as more carefully calculated numbers.

1 Like

Another possibility is for a royalty to be added to the current ERC-721 registrar contract, but not on the upcoming NameWrapper contract as an incentive for name owners to voluntarily wrap names.

2 Likes

That sets out to do something very different than what this proposal aims to do, however.

This proposal aims to mainly offset the running costs of ENS development and as a bonus slightly disincentivize secondary name sales.

I understand the approach, but as if my dance clients had to take care of my taxes.
Seriously I can’t find any relationship.

I also think that it can help to find a solution together.

1 Like

Right; my point is that the justification and the values for each are different. Your proposal seems primarily targeted at bringing in more income, in which case it needs to address why we need more income, and how we will know when we have “enough”.

3 Likes

That wasn’t my intention. I thought I was very clear that the intention is to offset the running funding for development, that’s not because we don’t have enough in the treasury (it’s clear to everyone that we do right now) but to ensure long-term viability. That’s also why I voted for the 6% option, which is the lowest royalty which offsets the running costs TNL has requested for development.

And why there’s a poll option to earmark revenue from royalties for development costs, in case someone wants to ensure that it’s used for precisely that and nothing else.

Just the same as the enDAOment isn’t intended to bring in more income, but to likewise ensure long-term viability. The arguments are the same for both that and this in that respect, and I think this would augment the enDAOment well.

Offsetting expenses and bringing in more income are functionally the same thing. :slightly_smiling_face:

My point is that per the constitution, a fee is legitimate if it regulates the market or ensures the financial viability of ENS. If the latter is what your proposal is mainly targeted at, it needs to clarify what the criteria are for changing it - at what point would it become unnecessary?

Unfortunately, I also don’t support this proposal.

I think it’s too early to bring “sale tax” into web3.

I also think it’s kind of against the web3 “ethos” of ownership, and the freedom to use the digital objects you purchased as you will, without anyone being able to prevent you from doing this.

ENS DAO maybe doesn’t profit directly from secondary markets, but it does so indirectly. After all, those markets contribute to the popularity of ENS. Because of those markets people have incentive to obtain more name with trading value, which increases the amount of ENS annual renting fees.

4 Likes

This intends to do both, like I said earlier.

Ah, I think I understand where you’re coming from a little better now. My hope was to leave those details out in the temp check, but to introduce them in the actual proposal if the temp check is positive.

The reason for that is because it would require more careful calculation of the royalties, which is a lot of work spent if the general sentiment is against any royalty altogether. Does that alleviate your concerns?

If not, I’d be happy to incorporate anything you’d like to contribute to the temp check that does.

A preliminary thought would be to increase the royalties to n% until the wallet reaches say 5 years of running cost funding (~US$ 21M rounded upwards) and once it reaches that, to decrease the royalties until it drops to say half that and to then increase it again.

This would require earmarking the funds for TNL running costs, however, which it seems most people are against. Personally I can go either way on that.

@Cthulu.eth - Thanks for suggesting this.

Re the first goal:

  • If we’re concerned that the ENS treasury might not be able to support the protocol in the long term and that ENS needs additional revenue, wouldn’t the more equitable solution be to raise the registration/renewal fees for all names? I don’t support either option at this time, just asking why the royalty fee would be the better revenue generation option than simply raising reg/renew fees.

  • Also, I’d think that imposing a royalty (sales tax, transaction fee, etc) could easily be seen as infringing on name ownership rights as mentioned in posts above. The constitution says we can’t enact changes that “…unfairly discriminate against name owners’ ability to extend, transfer, or otherwise use their names.” Singling out secondary sales as a source of income could trigger the “…unfairly discriminate…” part.

Re the second goal:

  • Would a 6% price increase really do very much to cool off the secondary market? If the goal was to make those sales less attractive we’d probably have to add more than 6% to the sales.

I’m also curious, would we even have a reliable way to determine when a name is sold privately vs. simply transferred from one wallet to another under the same owner?

Last thought, if the DAO is directly profiting off of some of these inflated secondary market sales, could that drag us deeper into some of the DMCA, copyright, or incorrect usage lawsuits that have started popping up? If we’re profiting off the sale, could we potentially then be a party in the lawsuit?

Thanks again. Just my 5¢ :wink:

2 Likes

It’s not about it being a better option of making money so much as being an additional revenue stream. The way it future proofs the protocol isn’t necessarily by raising more funds, but in raising funds from a different source so that we’re not at the complete mercy of registrations and renewals alone.

One fundamental difference is also that royalties on secondary market sales only affects name scalpers, whereas increasing the fees you suggest would impact all users of ENS. Historically the sentiment has also been against raising the fees apart from the premium.

It’s only mentioned in one single post, not posts. It doesn’t infringe on name ownership rights more than any other type of fee like premium costs, invalidating names after the fact or increasing the renewal fees of names after they were purchased.

It doesn’t.

I’ve already answered this:

Any percentage royalty would cut into the profits of name scalpers, to what degree depends on how high it is, for 6% it would introduce slight friction as a bonus and augment other solutions like the premium fee at no added cost to users (unlike increased registration and renewal fees).

That’s a win/win.

Royalties only affect sales on marketplaces like OpenSea, and wouldn’t affect transfers of names outside of those marketplaces.

That’s a good question. I’m not a lawyer, so it’d be best if someone who is chimes in on this. From what I’ve read previously anyone who stands to profit would be a target for a lawsuit and since it’s usually difficult to find the actual domain seller, I’d imagine that ENS is first in line to be sued either way.

But like I said, I’ll defer to a lawyer on this.

1 Like

Fair enough! Consider this feedback on what any draft proposal should contain, then.

Personally I don’t think this would constitute unfair discrimination.

This is a pretty compelling argument to me.

3 Likes

oppose

3 Likes

I think this might constitute ‘running before one can walk’.

Whilst annoying, those being referred to as ‘scalpers’ have (to be fair to them) done a great job marketing ENS.

‘scalper’ is subjective. See web2 ‘cybersquatting’, ‘reverse domain hijacking’ etc.

It’s annoying that I can’t get coolname.eth and actually use it because someone has registered it to sell for a profit but theres a lot of slippery slope poor precedent setting that occurs if you tax someone because they got something you want.

My main opposition to this is that the premium registration fees for short names etc and the whole auction process was designed to result in an economically efficient of names. In hindsight that was obviously never going to happen because the demand just wasn’t there years ago. More fool me, but I was there and super interested in ENS and still didn’t think it was worth registering loads of names that are now selling for loads.

My general point being a tax on people who speculated correctly only seems fair if you’d have also taxed them if they’d got it wrong. Taxing people for taking a risk that paid off doesn’t seem reasonable.

It’s a free market economy so someone could create a marketplace with a fee on sales, but requiring it at the protocol level will just result in ‘ENS Classic’ imo XD

6 Likes

More adoption takes care of any lack of funding which is non -issue at the moment.
I also oppose.

1 Like

A strong oppose.

This temp check is now closed, since the temp check was negative it won’t proceed to a draft proposal.

Just as a note - the intention with temp checks isn’t to use forum polls as a gating function. It’s reasonable to expect that the votes from a self-selected set of forum participants may be quite different from the DAO’s vote as a whole.

Temp check authors are welcome to use them, but don’t have to treat them as binding; the main purpose of a temp check is to get feedback on an idea, how it should be adjusted, and whether it’s viable.